Financial Analysis
Note Taking Guide Key
Leanne Brown
Net Worth Statement
•(Balance Sheet)
•Net Worth = Assets - Liabilities
•Net Worth (Owner's equity)
Current Assets
 can be converted to cash in less than one year
o checking/savings
o money owed you
o inventory for sale
o stocks, bonds, life insurance
Intermediate Assets
 resources or production items with a life 1 to 10 years
o equipment
o machinery
o breeding livestock
o generally depreciable
Fixed Assets
 (long term) permanent items :
o real estate
o improvements on buildings
Current Liabilities
 debts due within one year
 bank notes
 accounts payable
 rent, taxes, interest
Intermediate Liabilities
•
non real estate debt of 1 to 10 years
Long-Term Liabilities
•
Mortgages and land contracts on real estate minus principal due within 12 months
Financial Tools
• Comparative Analysis - compare statements from one year to another
• Projected Analysis - compare statements to expected statements
• Ratio Analysis - compare statements to another farm
Financial Terms
 Liquidity - ability to generate cash
 Current Ratio = Current Assets / Current Liabilities
 Intermediate Ratio = (CA + IA) / (CL + IL)
 Solvency - if assets exceed liability
o Net Capital Ratio
o Debt-Equity Ratio
Ratios
•
•
Net Capital Ratio = Total Assets / Total Liabilities
Debt-Equity Ratio = Total Liabilities / Owners Equity
Terms
 Income Statement (Profit / Loss Statement)
o list receipts and expenses
 Receipts - money received from sales during year
o all incomes
 Expenses - money paid to operate a business
 Net Cash Income = Gross Receipts Expenses
 Adjustments to Income:
o Expenses Payable
o Prepaid Expenses
o Adjustments in Inventories
o Products grown & used at home
 Net Farm Income = Net cash
income + Noncash adjustments
Ratios
 Operating Ratio = Total Operating Expenses / Gross Income
o relates amount of gross income spent on operating expenses
 Fixed Ratio = Fixed Expenses / Gross Income
o relates amount of gross income spent on fixed expenses
 Gross Ratio = Total Expenses / Gross Income
o relates amount of gross income spent on all expenses
Even More Terms
 Capitol Turnover = (Unadjusted Gross Income + Noncash Adjustment)/ Average Capitol Investment
or (Total Assets)
 higher rates mean a greater chance of profit or a quicker turnover of money invested
 20% per year is good

Return to Equity Capital = Net Farm Income - Operator Labor Allowance
o amount of income for your labor
Return to Equity Capital
• Return On Total Capital = Net Farm Income+Interest Paid-Operator Allowance
--------------------------------Return to Total Capital
• Return on Equity Capital = Return to Equity Capital / Avg Net Worth
Return to Equity Capital
• Compare this rate to the cost of borrowing money
• if interest rate is lower, it may be profitable to borrow money
• if interest rate is higher, do NOT borrow money